Smith Manoeuver Mortgage Comparison

[shassy63]

Following a suggestion from another poster, I'd thought I'd ask if anyone has done a (recent) decent comparison on mortgages suitable for the Smith Manoeuvre. If this has already been done, please let me know where to find it.

I'm going to start the process of going to all the banks tomorrow and see what they tell me. I've been staring at the computer screen so long trying to analyze the different products over the internet, that they've begun to blur together.

They all seem fairly similar, with fixed and variable rate portions. A lot of them sound like the Manulife One where the mortgage and LOC are just combined together.

Does a mortgage with a line of credit option typically cost more (I know the Manulife One does)? Or can you get a standard mortgage, and then just get a line of credit which is dependent on the equity attached to it?

Thanks

[FrugalTrader]

Following a suggestion from another poster, I'd thought I'd ask if anyone has done a (recent) decent comparison on mortgages suitable for the Smith Manoeuvre. If this has already been done, please let me know where to find it.

I'm going to start the process of going to all the banks tomorrow and see what they tell me. I've been staring at the computer screen so long trying to analyze the different products over the internet, that they've begun to blur together.

They all seem fairly similar, with fixed and variable rate portions. A lot of them sound like the Manulife One where the mortgage and LOC are just combined together.

Does a mortgage with a line of credit option typically cost more (I know the Manulife One does)? Or can you get a standard mortgage, and then just get a line of credit which is dependent on the equity attached to it?

Thanks

I have a few articles on the Smith Manoeuvre which includes a discussion on the mortgages available. I believe the most popular options are the Manulife ONE mortgage, RBC Homeline mortgage, and the Firstline Matrix Mortgage.

You can read my review of the Manulife One Mortgage Here (http://www.milliondollarjourney.com/manulife-one-mortgage-as-good-as-it-sounds.htm).
And my articles on the Smith Manouvre: Part 1 (http://www.milliondollarjourney.com/the-smith-manoeuvre-a-wealth-strategy-part-1.htm), Part 2 (http://www.milliondollarjourney.com/the-smith-manoeuvre-a-wealth-strategy-part-2.htm).

I think the general consensus is that the M1 mortgage is too expensive. The issue with the RBC Homeline mortgage is that they require a "mortgage/notary" free of around $800 when you sign up AND they require a RBC bank account. I'm still looking for more details regarding the firstline matrix mortgage.

Hope this helps,
FT

[notanexpert]

I have a few articles on the Smith Manoeuvre which includes a discussion on the mortgages available. I believe the most popular options are the Manulife ONE mortgage, RBC Homeline mortgage, and the Firstline Matrix Mortgage.

You can read my review of the Manulife One Mortgage Here (http://www.milliondollarjourney.com/manulife-one-mortgage-as-good-as-it-sounds.htm).
And my articles on the Smith Manouvre: Part 1 (http://www.milliondollarjourney.com/the-smith-manoeuvre-a-wealth-strategy-part-1.htm), Part 2 (http://www.milliondollarjourney.com/the-smith-manoeuvre-a-wealth-strategy-part-2.htm).

I think the general consensus is that the M1 mortgage is too expensive. The issue with the RBC Homeline mortgage is that they require a "mortgage/notary" free of around $800 when you sign up AND they require a RBC bank account. I'm still looking for more details regarding the firstline matrix mortgage.

Hope this helps,
FT

I'm using the Scotia Total Equity Plan, and its working out quite well. I paid nothing to get it set up, I don't have to have an account with Scotia, and I got a competitive interest rate, prime-0.85% on the mortgage portion, prime on the LOC portion. It works well for the SM because your LOC limit goes up as your mortgage principal goes down. I set this up two years ago though.

[circa76]

I have a few articles on the Smith Manoeuvre which includes a discussion on the mortgages available. I believe the most popular options are the Manulife ONE mortgage, RBC Homeline mortgage, and the Firstline Matrix Mortgage.

You can read my review of the Manulife One Mortgage Here (http://www.milliondollarjourney.com/manulife-one-mortgage-as-good-as-it-sounds.htm).
And my articles on the Smith Manouvre: Part 1 (http://www.milliondollarjourney.com/the-smith-manoeuvre-a-wealth-strategy-part-1.htm), Part 2 (http://www.milliondollarjourney.com/the-smith-manoeuvre-a-wealth-strategy-part-2.htm).

I think the general consensus is that the M1 mortgage is too expensive. The issue with the RBC Homeline mortgage is that they require a "mortgage/notary" free of around $800 when you sign up AND they require a RBC bank account. I'm still looking for more details regarding the firstline matrix mortgage.

Hope this helps,
FT

I'm using the RBC homeline plan now.. I was already an RBC customer (and had my previous mortgage with them also) so I already had accounts with them. The administration fee was $445 and RBC paid $300 of it (I tried getting them to pay for all of it, but it was a no-go. They did, however, promise me that they'll give me free services up to the difference - whatever that means ;)

So far so good, the best thing about the homeline plan is that my LOC automatically increases with each mortgage payment, no need to re-apply!

[FrugalTrader]

I'm using the Scotia Total Equity Plan, and its working out quite well. I paid nothing to get it set up, I don't have to have an account with Scotia, and I got a competitive interest rate, prime-0.85% on the mortgage portion, prime on the LOC portion. It works well for the SM because your LOC limit goes up as your mortgage principal goes down. I set this up two years ago though.

The only downside that I can see with the Scotia plan is that you need to sign paperwork everytime that you want your HELOC limit to increase. Might not be a big deal to some, but a pain in the behind to me.

[notanexpert]

The only downside that I can see with the Scotia plan is that you need to sign paperwork everytime that you want your HELOC limit to increase. Might not be a big deal to some, but a pain in the behind to me.

I didn't even know that. It just shows up on my online statement as "additional credit available, contact your branch". never actually had to do that as I don't use up my entire LOC limit for the SM, I think that would be too aggressive in my situation (too highly leveraged if I did that).

[astroboi]

BMO has a Mortgage Cash Account: http://www4.bmo.com/personal/0,4344,35649_36715,00.html

[shassy63]

OK, so here's what I found out this afternoon:

Most of these products are similar, if not identical, to each other. They typically just vary in the small details (such as interest rate).

BMO Readiline: Typical LOC, with ability to lock in any or all portion of outstanding balance as a standard mortgage (fixed rate, variable, open, closed, etc...) or keep the entire amount as a revolving LOC at prime (6%). The rate I was quoted on the 5 year fixed closed portion was 5.19%, possibly lower if I'm serious enough to go through with the formal application AND move all my banking to BMO. LOC increases automatically with principal paydown of mortgage. Ability to make prepayments on mortgage amount (15% per year, I believe).

RBC Homeline: Same as above, interest rate 5 year fixed close: 5.2% (again, possibly lower). May double down payments, and prepay up to 15%. They need you to move your banking over as well.

Scotia Total Equity Plan: Same again, except as mentioned, to use your available increased LOC limit (after paying down a portion of your mortgage), you need to go on-line or into the branch to formally increase the limit. Apparently you're already pre-approved, but you need to make it official every time. The good news that offsets this irritation is that you DON'T need to switch banks and the rate I was quoted today was 4.95%! Or prime -0.85% for a variable rate mortgage. A sizeable discount to the other banks. Even better than a private broker or President's Choice.

Manulife One: Not a bad product, however as has been stated, they are definitely more expensive. It seems to me that it could be a good product depending on your circumstances. They advertise the fact that you can deposit your income straight into the account, and it lowers the outstanding balance right away (interest is calculated daily and charged monthly). The other banks do not have this facility, so you'd have to get paid and then move the money over yourself. If you choose the "open" revolving line of credit at prime, the cost is obviously the same as the other banks (6% as of today). However the way I understand it, you can only lock in 75% of your borrowing limit (so 75% of your original 75% home equity, if that makes sense) into a standard type mortgage, and the rate is 5.25% non-negotiable, whereas the other banks let you lock in any amount. There are also those pesky $14 monthly fees, which don't exist elsewhere.

The advantage for the Manulife One is that if you would typically have an emergency cash fund sitting around in a chequing account, why not put it towards the outstanding portion of your mortgage? Then you can still get at it whenever you want, or if you never use it, your mortgage is paid off faster. I think there would be problems for people are aren't disciplined with their spending, since you could theoretically never pay off you mortgage, just the interest.

I think I'll be going with the Scotia Total Equity Plan. I'm going to take the amount I'd normally have as a cash reserve, use that amount as my intial "open" prime rate LOC and lock in the balance at 4.95% (too scared to go variable). Then once I start increasing the LOC amount, I'll use the SM to invest (probably in a low MER Index fund and a dividend fund). Since I'm a cheap bastard, the $40 I save on the interest rate differential and banking fees is worth the phone call every month.

If you see any problems with these summaries, please let me know.

[circa76]

I think I'll be going with the Scotia Total Equity Plan. I'm going to take the amount I'd normally have as a cash reserve, use that amount as my intial "open" prime rate LOC and lock in the balance at 4.95% (too scared to go variable). Then once I start increasing the LOC amount, I'll use the SM to invest (probably in a low MER Index fund and a dividend fund). Since I'm a cheap bastard, the $40 I save on the interest rate differential and banking fees is worth the phone call every month.

If you see any problems with these summaries, please let me know.

I wouldn't necessarily shy away from a quarter or less percentage point on the interest factor. For a $100,000 balance on your LOC, its only an extra 21 or so dollars a month, which will become tax deductible.

But I do see your point of view.. the more money you save it better!

Good luck with it!

[Jaded]

Shassy....I just talked to a Royal bank representative and they said that you are not required to move your banking over.
I'm also in Ontario and a customer of Royal Bank. They quoted me a rate of 5.19%. Scotia Bank quoted me 5.1%.

[cannon_fodder]

Great work, shassy. Here are the notes from my one meeting at BMO re: ReadiLine.

1. Variable rate somewhere around prime -0.85% on mortgage, but prime on LOC portion. In addition, there are some caveats:

The mortgage portion would be closed - you can't pay it off early without penalty. If you want flexibility of 20%/20% prepayment/increased payment privileges, then they put the mortgage into a 3 year open - but then that is at prime.

Now, for the LOC portion there are additional caveats. You can lock it in and you can then get a reduced rate, but you have to pay both P&I. If you want
to go 'open', then the LOC rate is at prime but you only have to pay interest.

2. Allows multiple credit lines (based on numbers... maybe you can nickname them for your own use, but there are numbered to keep it separate and keep CRA happy).

3. Readvances automatically.

4. Probably allows automatic investing directly from credit line - how hard can that be?

5. There are legal and appraisal fees. Negotations will dictate whether the bank picks up all of the costs or just some. First impression is that appraisal will be easy because it is something like $130, but legal fees are almost $500 and getting them to eat that would be harder.

6. If you want to tap into equity that has been built up in the house due its increase in value (say in 2-3 years time) expect that #5 will apply again. I was ignorant of this fact - when you want to change your mortgage, you don't really change it. You discharge it and then create a new one. This is why the legal fees. If you want to tap into suspected equity due to increase in your home's value, then you need an appraisal and thus another fee.

7. LOC is compounded monthly, not semi-annually like the mortgage. This means effectively that a LOC costs you more than a mortgage even if the interest rate is the same.

I'm not 100% confident with my interpretation of the BMO representative because she was speaking from the top of her head. So, take what I have here with a grain of salt.

[cferneyh]

Great work, shassy. Here are the notes from my one meeting at BMO re: ReadiLine.

1. Variable rate somewhere around prime -0.85% on mortgage, but prime on LOC portion. In addition, there are some caveats:

The mortgage portion would be closed - you can't pay it off early without penalty. If you want flexibility of 20%/20% prepayment/increased payment privileges, then they put the mortgage into a 3 year open - but then that is at prime.

Now, for the LOC portion there are additional caveats. You can lock it in and you can then get a reduced rate, but you have to pay both P&I. If you want
to go 'open', then the LOC rate is at prime but you only have to pay interest.

2. Allows multiple credit lines (based on numbers... maybe you can nickname them for your own use, but there are numbered to keep it separate and keep CRA happy).

3. Readvances automatically.

4. Probably allows automatic investing directly from credit line - how hard can that be?

5. There are legal and appraisal fees. Negotations will dictate whether the bank picks up all of the costs or just some. First impression is that appraisal will be easy because it is something like $130, but legal fees are almost $500 and getting them to eat that would be harder.

6. If you want to tap into equity that has been built up in the house due its increase in value (say in 2-3 years time) expect that #5 will apply again. I was ignorant of this fact - when you want to change your mortgage, you don't really change it. You discharge it and then create a new one. This is why the legal fees. If you want to tap into suspected equity due to increase in your home's value, then you need an appraisal and thus another fee.

7. LOC is compounded monthly, not semi-annually like the mortgage. This means effectively that a LOC costs you more than a mortgage even if the interest rate is the same.

I'm not 100% confident with my interpretation of the BMO representative because she was speaking from the top of her head. So, take what I have here with a grain of salt.

I'm in the middle of switching over to BMO Readiline from Manulife One (the switch was brought on by reading here that I wasn't getting a terribly good deal with Manulife One).

My experience was a little different from yours as BMO is giving me a completely open variable mortgage (-0.85% off prime) and they are covering all legal and appraisal fees.

[cannon_fodder]

I'm in the middle of switching over to BMO Readiline from Manulife One (the switch was brought on by reading here that I wasn't getting a terribly good deal with Manulife One).

My experience was a little different from yours as BMO is giving me a completely open variable mortgage (-0.85% off prime) and they are covering all legal and appraisal fees.

Your information is definitely more valuable than mine. My mortgage doesn't renew until 16 months from now so we were only talking "hypothetically".

Please keep us posted and provide any additional details!

TIA.

[Spazmogen]

In 24 hours, I will have renewed my RBC mortgage early. I am switching to Homeline just so I can do the SM.

I'll post my results on Thursday 05 April as to what rate I am offered etc.

Open or closed is of no concern to me at this point. I will have an anniversary date just after tax time, so I can put my tax return against the mortgage with ease each year. As long as I can put 10% or more against the principal each year, I'll be happy.

[houska]

Thanks for the wonderful summary of different bank's products. Anyone seriously looked at TD HELOC for this? I spoke with them a few months ago before I knew all the right questions to ask. As I understand it, you're at prime for the fully open variable LOC part, and can lock in parts at a competitive fixed rate with some prepayment oppty, but can't beat prime for a variable rate. They seemed willing to neotiate on set up costs. I did not ask the other (highly relevant) questions mentioned above, and wondering if anyone did....

[frankal101]

I'm in the middle of switching over to BMO Readiline from Manulife One (the switch was brought on by reading here that I wasn't getting a terribly good deal with Manulife One).

My experience was a little different from yours as BMO is giving me a completely open variable mortgage (-0.85% off prime) and they are covering all legal and appraisal fees.

I am too going with BMO. I got the same completely open variable for prime-.85 and a 3 year term. The did not charge me any legal or appraisal fees to set this up (new purchase), but I will negotiate on future costs (as per cannonfodders post above). I will try to get some concessions for BMO discount brokerage (Investorline), as they charge $20+ for a trade normally. I also specifically asked for multiple LOCs, so that is not an issue...

I was looking at M1, but IMO this BMO rate and flexibility of the complete open structure (i was told no 20/20 payment model - pay as much as often as you like) makes it miles ahead of M1. You do lose the daily vs semi-manual compounding, but gain much more on interest rate spread! - (not to mention $14 a month)

[cferneyh]

I was looking at M1, but IMO this BMO rate and flexibility of the complete open structure (i was told no 20/20 payment model - pay as much as often as you like) makes it miles ahead of M1. You do lose the daily vs semi-manual compounding, but gain much more on interest rate spread! - (not to mention $14 a month)

Yeah, that's exactly what brought the change on for me. The difference will amount to well over $2K in interest savings per year for us.

[Bick Financial Toronto]

This is an excellent thread and very informative. Just so we don't fall into a groupthink mentality, let me offer a few comments so we don't lose site of the forest while we are mining the trees:

1.) The cheapest deal is not always the best. If it was, we would only shop at Dollarama.

2.) Financial services is not always a commodity although in some cases like mortgages, especially with the plain vanilla type, it usually is. A commodity product implies that you get the exact same service/product from different suppliers and therefore price comparison is easy. I venture to say that an SM-type mortgage structure is more complex and therefore not a commodity, and consequently it leaves the door open for surprises down the road when the cost of moving the business is high.

3.) Index-type investing is back in fashion again, just like it was in the second half of the 90s. Just before their free-fall which lasted for over two years. Maybe it is time to review the reasons why indexing came back... Does anyone remember Nortel? Or Enron? Or Bre-X Minerals?

4.) The SM is about 1/3 financing (setting up the right mortgage structure) and 2/3 investing (what you do with the money once you have it). I hear people on this and other forums to go at it themselves. That could be a fatal mistake when it goes wrong because there is so much at stake: your financial independence.

5.) Hedging your bets is generally a good thing. It let's you sleep at night. If you could get some great fixed rates today while still being exposed to variable rates through your LOC then you will win no matter what rates will do in the future. There is value in mortgage payment stability as evidenced by Shassy63 who is a self-proclaimed chicken but in finance that's a very useful quality so I really mean it as a big positive.

6.) If anyone likes reading about personal investing, Nick Murray's book of "Simple wealth, inevitable wealth" is a worthwhile read.

[reddie]

Hello fellow Smith Manoeuvre-ers

I am doing a different form of the manoeuvre but basically it works the same way

- I have a mortgage with Westminster Savings and my money is split 3/4 into a traditional mortgage and 1/4 into a HELOC at prime. (I can double my monthly payments into my traditional mortgage, i thought that was a great plus!)

- with IG (investor's group), my financial advisor borrowed 50k at prime +1% (not very happy with this rate but he said that if i found a better deal we could switch) and he put my money into mutual funds and dividend funds (most of them ING or partners with ING, not too happy about this) and i pay a monthly interest fee of about $300.

So in the end, I am doing a mixed sort pay-your-mortgage-down-as-fast-as-you-can AND SM

So now I'm wondering, should I put all my money into the SM? I am quite comfortable with leveraging. Also, does anyone know who may borrow money at the best rate? I'm looking for prime rate. (BC resident)
Also, I'm not too happy with my financial advisor, I am currently stuck with the $50k in his hands but could I go somewhere else with my future investments?

Thanks for reading the long post.

[notanexpert]

...
So now I'm wondering, should I put all my money into the SM? I am quite comfortable with leveraging.

That is the most difficult of questions. I ask myself that every day - should I increase leverage? For me, the most prudent reasoning is to look at past performance - if you've been getting much more than long-term market averages, I'd say decrease leverage slowly, if your investments are doing poorly, increase leverage slowly. This way you're doing a bit of market timing, i.e. buying low and selling high. It is hard to find a reference point though.
You are doing a very expensive SM though, borrowing at prime plus one and going through mutual funds (another 1-3% MER) is cutting a lot off the top for you. I'd look at reducing those costs before I'd increase leverage.

[cannon_fodder]

Would anyone who has set up, or is about to set up, a SM-type mortgage comment on the LOC rate? It seems as though a LOC rate at prime is typical but is that locked in or variable? Has anyone received a LOC rate at better than prime (e.g. perhaps with a dependency on how much house equity remains unleveraged)?

[notanexpert]

Would anyone who has set up, or is about to set up, a SM-type mortgage comment on the LOC rate? It seems as though a LOC rate at prime is typical but is that locked in or variable? Has anyone received a LOC rate at better than prime (e.g. perhaps with a dependency on how much house equity remains unleveraged)?

I got my HELOC at prime, variable rate. The previous institution I was with charged me prime plus 1/4.
My mortgage plus available HELOC is about 65% of the value of my house.

[frankal101]

Would anyone who has set up, or is about to set up, a SM-type mortgage comment on the LOC rate? It seems as though a LOC rate at prime is typical but is that locked in or variable? Has anyone received a LOC rate at better than prime (e.g. perhaps with a dependency on how much house equity remains unleveraged)?

my bmo rep is giving me prime variable on LOC portion - would not budge on the rate and the terms :( Absolutely no fixed rate, unless you want to convert that to a mortgage and start paying some of the principal back... i have a traditional mortgage.

[CDNPatriot]

http://www.comtechcu.com/

I'm with them currently but not with the new home line of credit one. Would this fulfill the criteria of a TSM mortgage?

[TrevorK]

http://www.comtechcu.com/

I'm with them currently but not with the new home line of credit one. Would this fulfill the criteria of a TSM mortgage?

What you have to do to utilize the SM is to borrow money for investments (The investments must meet certain criteria).

For all they care you can borrow the money from Insta-Loans or VISA as long as you have the paperwork to back it up.

[NFtoBC]

http://www.comtechcu.com/

I'm with them currently but not with the new home line of credit one. Would this fulfill the criteria of a TSM mortgage?

This does not appear to be a re-advancable mortgage product. The SM requires that you invest the equity that is generated in your mortgage on a monthly basis. If you are not converting your mortgage debt to a deductible loan in that manner, you are simply leveraging.

[NFtoBC]

Hello fellow Smith Manoeuvre-ers

I am doing a different form of the manoeuvre but basically it works the same way
No. You're simply leveraging.

- I have a mortgage with Westminster Savings and my money is split 3/4 into a traditional mortgage and 1/4 into a HELOC at prime.
If you do not have an empty HELOC, then you simply have a more expensive mortgage, as better rates are available on the mortgage side. The SM depends on you being able to use your re-advancable mortgage to invest on a monthly basis, thereby reducing your non-deductible debt, and replacing it with a deductible loan.

(I can double my monthly payments into my traditional mortgage, i thought that was a great plus!)
This option is available from most banks. It is not unique to your CU.


- with IG (investor's group), my financial advisor borrowed 50k at prime +1% (not very happy with this rate but he said that if i found a better deal we could switch) and he put my money into mutual funds and dividend funds (most of them ING or partners with ING, not too happy about this) and i pay a monthly interest fee of about $300.
The SM does not cost you any out-of-pocket interest expense. You have simply leveraged in an expensive manner.

So in the end, I am doing a mixed sort pay-your-mortgage-down-as-fast-as-you-can AND SM
You could pay your mortgage faster if you actually applied the real SM.

So now I'm wondering, should I put all my money into the SM? I am quite comfortable with leveraging.
You could, but you'd have to actually set up the Smith Manoeuvre to accomplish that goal.

Also, does anyone know who may borrow money at the best rate? I'm looking for prime rate. (BC resident)
Just about any financial institution will advance funds against the equity you have in your home at Prime. From your previous quotes, you are using an unsecured LOC for your investments. Once you have some equity in your home, you can obtain a secured LOC, or use the one you currently have at your CU, once you have removed all the mortgage costs from it.

Also, I'm not too happy with my financial advisor, I am currently stuck with the $50k in his hands but could I go somewhere else with my future investments?
If he has promoted the actions in which you have engaged as the SM, I would remove all the investments I had with him, and find a more seasoned advisor.

[FinancialJungleGuy]

Would anyone who has set up, or is about to set up, a SM-type mortgage comment on the LOC rate?

Not sure if this alternative works for you. Say you have $100k in HELOC to invest. Open an Interactive Brokers account since they have a 5.75% margin rate for balance less than $115k. Instead of investing all $100k from your HELOC, borrow $40k from HELOC and $60k from Interactive Brokers.

[cannon_fodder]

Not sure if this alternative works for you. Say you have $100k in HELOC to invest. Open an Interactive Brokers account since they have a 5.75% margin rate for balance less than $115k. Instead of investing all $100k from your HELOC, borrow $40k from HELOC and $60k from Interactive Brokers.

That's actually the kind of thinking I was wondering about. However, when I spoke to someone at IB (he sure sound rushed and less a CSR than a trader) he mentioned that it would be a maximum margin of 50% (unless it was on the TSX, over $2, optionable and then you could get 70% intraday). I didn't ask about US exchanges - is that where you could get a more leveraged position as you suggested?

[FinancialJungleGuy]

That's actually the kind of thinking I was wondering about. However, when I spoke to someone at IB (he sure sound rushed and less a CSR than a trader) he mentioned that it would be a maximum margin of 50% (unless it was on the TSX, over $2, optionable and then you could get 70% intraday). I didn't ask about US exchanges - is that where you could get a more leveraged position as you suggested?

I did some research on Interactive Broker's margin requirements. Here's the quote:

Canadian Special Stock Margin Requirements. List of Securities Eligible for Reduced Margin determined by the IDA (supplement).

Long and Short Positions:
30%*Stock value.

The list of eligible of canadian stocks is very long. You can find them here:
www.interactivebrokers.ca/download/eligibleSecurities_IDA.pdf

Since the maintainance requirement is 30%, having 40% of "downpayment" will give you some wiggle room. You still have $60k in your HELOC should you come dangerously close to the 30% limit.

My understanding is that companies within S&P500 are also eligible for reduced margin requirements, but I couldn't find any links on the IB website.

[Goober56]

Heh guys first time poster long time reader of the SM stuff on RFD. Let me start this by saying that I am a complete financial newb.

I am slowing understanding this process, but I need to know basically what I need to do. Do I approach the bank and say, "Heh look, this is what I want to do, help me set it up"...

My mortgage is up for renewal in a couple months, TD even called to tell me as such and even offered me 5.4%, lucky me.

At any rate, I would like to get started on doing this, if anyone would like to help me out, fire me a PM.. Thanks.

[reddie]

thanks to everyone who replied to my SM questions.
im quite a newbie to all of this.

just trying to make my money work for me.

[CDNPatriot]

I checked out two banks for this product. BMO and Royal Bank.

BMO offerred me 5.09 mortgage fixed for three years.

Royal offerred it fixed for 5.24.

My house is worth $223,000.00
$155,000 is my mortgage.

However, my current normal non smith mortgage is 4.9 as offerred by my credit union. My income tax rate is 31 percent. Would it even be worth it for me if I do this with a dividend fund?

[pitz]

3.) Index-type investing is back in fashion again, just like it was in the second half of the 90s. Just before their free-fall which lasted for over two years. Maybe it is time to review the reasons why indexing came back... Does anyone remember Nortel? Or Enron? Or Bre-X Minerals?


At 2%/year, you can pretty much lose 1 TSX60 constitutent a year before you will even come close to losing money in a TSX60 index fund. Even the Royal Bank of Canada makes up no more than 7% of the TSX60 portfolio, and Enron was a negligible part of the S&P500 as well. Your comment with respect to Bre-X Minerals isn't even worth mention.



4.) The SM is about 1/3 financing (setting up the right mortgage structure) and 2/3 investing (what you do with the money once you have it). I hear people on this and other forums to go at it themselves. That could be a fatal mistake when it goes wrong because there is so much at stake: your financial independence.


The paradox is that if you don't 'do it yourself', the probability of making money on the SM isn't very good. Between MERs, deferred sales charges and loads, loss of tax-advantaged dividends and cashflows from the funds themselves, and advisors, who, for professional reasons, are required to place a portion in bond funds, the probability of making money with an advisor 'helping' you on the SM isn't very good.

Now, a fee-only planner, who charges a couple thousand for an investment policy statement, asset allocation, and a proper currency hedge strategy, and implementation advice, would be well worth the money, and I would recommend this to anyone who is not very sophisticated.


5.) Hedging your bets is generally a good thing. It let's you sleep at night. If you could get some great fixed rates today while still being exposed to variable rates through your LOC then you will win no matter what rates will do in the future. There is value in mortgage payment stability as evidenced by Shassy63 who is a self-proclaimed chicken but in finance that's a very useful quality so I really mean it as a big positive.


Agreed; a zero-duration debt portfolio leaves one quite vulnerable, especially if the resulting duration gap is wide and rates change substantially. The investments could be repriced unfavourably, while the loans are not repriced. Very bad. Which is why the SM is actually pretty powerful; traditional margin loans don't have a mechamism for modifying duration, and interest rate swaps aren't really available to 'retail' investors either for portfolio immunization purposes.

[pitz]

That's actually the kind of thinking I was wondering about. However, when I spoke to someone at IB (he sure sound rushed and less a CSR than a trader) he mentioned that it would be a maximum margin of 50% (unless it was on the TSX, over $2, optionable and then you could get 70% intraday). I didn't ask about US exchanges - is that where you could get a more leveraged position as you suggested?

Unfortunately, because of SMA limits, you cannot effectively leverage an IB account beyond 2, even if all of your stocks are 30% marginable.

The real power of an IB account is the ability to borrow in foreign currencies, to hedge your portfolio of borrowing, to your portfolio of investments.

For instance, if your portfolio allocation is 60% Canadian, 20% US, and 20% Mainland Europe, a good hedge to reduce volatility would be:

Borrow 60% in Canadian dollars from the HELOC.
Borrow 20% in US dollars from the IB Margin Account
Borrow 20% in Euros from IB.

Invest the Euros directly into European companies (bypassing ADRs), or invest in ADRs or ETFs, and then execute a currency trade on the USD/EUR pair. Voila, your investment principal is immunized from substantial swings in the Euro, US, and Canadian dollars.

[homestar]

Looks like what you are doing is actually called the Smith / Snyder Maneouvre. The idea of the Snyder portion is to excellerate the pay down of your existing bad debt mortgage (not tax deductible). The line of credit portion should be placed in a distribution fund that will actually provide you with a monthly dividend that can be applied to your mortgage. This can be excellerated further with a business investment loan. For example if you have $25,000 available to borrow from your line of credit, a 2 to 1 business investment loan can be easily arranged. They would loan you double your personal investment, for example if you have $25,000 they would loan you an addition $50,000 therefor giving you $75,000 to invest into the distribution fund creating an even larger monthly dividend. This process greatly excellerates the Smith Maneouvre.

Most lending institutions do not offer the proper mortgage financing for the Smith Maneouvre. You need a product that allows the immediate reborrowing of the principle payment for investment purposes. Simply having a mortgage and a line of credit doesn't work well as you would need to continually ask your lender for increases to your Line of Credit.

The product recommended by Fraser Smith is called the "Matrix" and is only availble through brokers. It is made up of a fixed portion at discount rates and a line of credit portion at prime. As the principle on the fixed portion is paid down, the limit is automatically increased by the same amount on the line of credit portion for investment.

I have found that most financial planners really don't understand the Smith Maneouvre and simply right it off as simple leverage. I highly recommend that you work with people that truely understand the process to maximise your results.

Thanks for reading.

[homestar]

Following a suggestion from another poster, I'd thought I'd ask if anyone has done a (recent) decent comparison on mortgages suitable for the Smith Manoeuvre. If this has already been done, please let me know where to find it.

I'm going to start the process of going to all the banks tomorrow and see what they tell me. I've been staring at the computer screen so long trying to analyze the different products over the internet, that they've begun to blur together.

They all seem fairly similar, with fixed and variable rate portions. A lot of them sound like the Manulife One where the mortgage and LOC are just combined together.

Does a mortgage with a line of credit option typically cost more (I know the Manulife One does)? Or can you get a standard mortgage, and then just get a line of credit which is dependent on the equity attached to it?

Thanks


The Firstline Matrix is the product recommended by Fraser Smith. It has 20% pre-payment priviledges on the fixed portion and the line of credit has it's limit increased immediately after ther has been a principle payment on the fixed portion. There are no appraisal costs but there re legal fees to register the mortgage. The fixed portion is at best discount rates and the line of credit portion is at prime

Hope this helps

[Shojin]

Most lending institutions do not offer the proper mortgage financing for the Smith Maneouvre. You need a product that allows the immediate reborrowing of the principle payment for investment purposes. Simply having a mortgage and a line of credit doesn't work well as you would need to continually ask your lender for increases to your Line of Credit.


Most lending institutions DO offer just this.

Royal Bank Homeline Plan
Scotiabank STEP
Manulife ONE
BMO Readiline
TD CanadaTrust Home Equity LOC
CIBC Home Power LOC
HSBC Equity Power Mortgage

and others as well....

[homestar]

Some what true depends on whether or not you are looking at the Smith Maneouvre or simply taking advantage of leveraging the equity in your mortgage.

RBC Homeline is the closest, however the pre-payment priviledge is only 10% which if you are doing the Smith Man properly will cost you more in penalties.

The Scotia Step mortgage is divided in separate pieces, there is no real time access to reborrowing the principle payment.

Manulife One lumps all your finances into one pile - can be confusing.

The balance are simply lines of Credit - perfect for leverage, not the Smith Man.

Fraser Smith recommends "The Matrix"

[Shojin]

Don't know about the others (but I suspect most are the same) but with BMO Readiline the terms of prepayment/lump sum payments are set by the terms of the mortgage side of the equation. I have a Readiline and it's tied to an open mortgage product, meaning I can at any time increase my payments or make lump sum payments and immediately have access to that paydown on the borrowing side.

I'm not familiar with the Matrix product Smith mentions in his book - how does it differ from what the banks offer?

[homestar]

It sounds like the Rediline would be similar however none of the other banks offer a product that works the same. The RBC Homeline is similar but has a lower pre-payment priviledge which could prove to be expensive.

I'll need to look into BMO - just never been a big fan of theirs. I have always preferred to deal with institutions that don't try and tie me up. I don't believe financial planners that are employees of a big bank truely have my best interest at heart.

I'm sure that most lenders will eventually come up with a product that fits the Smith Man as it is becoming very popular.

A program that I don't see mentioned often is the Smith / Snyder Maneouvre - this will be in Fraser's next book - I am wondering if many of the readers are familiar with this program.

[pitz]

Looks like what you are doing is actually called the Smith / Snyder Maneouvre. The idea of the Snyder portion is to


Wow, aren't we getting a bit fancy here? Snyder???


excellerate the pay down of your existing bad debt mortgage (not tax deductible). The line of credit portion should be placed in a distribution fund that will actually provide you with a monthly dividend that can be applied to your mortgage.


That's a good idea, but its important to emphasize that the 'distribution' itself must consist of either tax-paid dividends, or flowed-through operating income (and not return of capital) in order to qualify. Just using a run-of-the-mill income trust or systemic withdrawal plan may very well be creating nothing more than a tax sham that would be disallowed.



This can be excellerated further with a business investment loan. For example if you have $25,000 available to borrow from your line of credit, a 2 to 1 business investment loan can be easily arranged. They would loan you double your personal investment, for example if you have $25,000 they would loan you an addition $50,000 therefor giving you $75,000 to invest into the distribution fund creating an even larger monthly dividend. This process greatly excellerates (sic) the Smith Maneouvre.


And greatly augments the risk as well. I seriously wouldn't recommend that; the SM is risky enough as it is without adding a ton of additional debt.


I have found that most financial planners really don't understand the Smith Maneouvre and simply right it off as simple leverage. I highly recommend that you work with people that truely understand the process to maximise your results.


Some do, some don't. Some deliberately discourage it because its professionally not a good idea to get clients into such amounts of leverage, especially if they add the investment loan(s) ontop of that.

Being a financial planner is all about reputation, and little about skill. If you have a good reputation, girlfriends tell girlfriends about you, word gets around, and they build their businesses. If suddenly a bunch of accounts blow up because the housing and the stock markets go down 25% and you leveraged to the hilt....well, that's not good.

[Spazmogen]

Just remember: OPEN MORTGAGE is what you need for the SM. Variable works too.

Open provides you with the flexibility to pay as much down as you want at anytime.

re:HELOC rate. Most are at prime and variable.

[ehmcee]

I'm looking at the BMO Readiline to do the SM. Is there anyone out there using BMO for a SM? How well does it work?

[homestar]

Just remember: OPEN MORTGAGAE is what you need for the SM. Variable works too.

Open provides you with the flexibility to pay as much down as you want at anytime.

re:HELOC rate. Most are at prime and variable.

your right, but Fraser recommends the mortgage be in 2 parts. 1 part "Bad Debt" (Fixed Portion) 1 part "Good Debt" (Line of Credit Portion) with the ability of real time limit increases in your "Good Debt" side. Most mortgage products offered today don't have an open feature on both parts.

Do you know of one?

[Spazmogen]

your right, but Fraser recommends the mortgage be in 2 parts. 1 part "Bad Debt" (Fixed Portion) 1 part "Good Debt" (Line of Credit Portion) with the ability of real time limit increases in your "Good Debt" side. Most mortgage products offered today don't have an open feature on both parts.

Do you know of one?

You've confused the HELOC with the mortgage portion. Part 1 is simply the mortgage and nothing but the mortgage. Part 2 is the HELOC and only the HELOC. Although they are part of the RBC Homeline Plan, they are separate entities.

My RBC Homeline Plan is split into 2 mortgages with slightly different ending times. One is up in May, the other August. Both mortgage parts are open/variable.

The HELOC portion is variable. A HELOC is always OPEN (you can pay it off anytime you want). A HELOC is nothing more than a Line of Credit associated to your home equity.

My SM setup:

RBC Homeline Plan.
Mortgage 1: open and variable The bulk of my mortgage
Mortgage 2: open and variable. $ was used for a large renovation.
HELOC 1: (auto-readvances with every mortgage payment)
HELOC 2: (Static $5000 for gorilla capitalization )

[elty]

You've confused the HELOC with the mortgage portion. Part 1 is simply the mortgage and nothing but the mortgage. Part 2 is the HELOC and only the HELOC. Although they are part of the RBC Homeline Plan, they are separate entities.

My RBC Homeline Plan is split into 2 mortgages with slightly different ending times. One is up in May, the other August. Both mortgage parts are open/variable.

The HELOC portion is variable. A HELOC is always OPEN (you can pay it off anytime you want). A HELOC is nothing more than a Line of Credit associated to your home equity.

My SM setup:

RBC Homeline Plan.
Mortgage 1: open and variable The bulk of my mortgage
Mortgage 2: open and variable. $ was used for a large renovation.
HELOC 1: (auto-readvances with every mortgage payment)
HELOC 2: (Static $5000 for gorilla capitalization )

I think that's what he meant:

Banks allow you split your mortgage into 2 or 3 parts, what he was referring is:

Part 1: Close, fixed mortgage
Part 2: Open mortgage
Part 3: HELOC

Unless you are extremely rich no one can pay down a mortgage in a short time. With a portion of your mortgage close, you enjoy lower rate, even if you opt for the variable rate on that portion.

ie.

Instead of a 200K open mortgage, I can split it into 2 x 100K, one close, one open. The close one will enjoy lwoer rate, and I can still pay down the open portion if I like.

[homestar]

I think that's what he meant:

Banks allow you split your mortgage into 2 or 3 parts, what he was referring is:

Part 1: Close, fixed mortgage
Part 2: Open mortgage
Part 3: HELOC

Unless you are extremely rich no one can pay down a mortgage in a short time. With a portion of your mortgage close, you enjoy lower rate, even if you opt for the variable rate on that portion.

ie.

Instead of a 200K open mortgage, I can split it into 2 x 100K, one close, one open. The close one will enjoy lwoer rate, and I can still pay down the open portion if I like.

The RBC Homeline does work but the problem with the open fixed portion is the rate is generally higher. If you get a closed portion with RBC the pre-payment is only 10%.

Firstline's Matrix offers 20% pre-payments and full discount rates. The HELOC portion is fully open.

If the Fixed portion and the HELOC portion isn't in sync so that your principle payment on the fixed portion immediately increases your limit on the HELOC portion you won't be able to properly administrate the SM.

Many products offered at the bank such as The Step doesn't have this feature.

The BMO Rediline operates like The Matrix, but I understand that your payment is fixed for the term - it does not decrease if you pay down the HELOC portion

I do mortgages for a living and everthing seems to be pointing to Firstline's Matrix when implementing the SM

[Bick Financial Toronto]

As a mortgage broker and financial planner I had a number of clients who used different lenders to set up the structure for the Smith Manoeuvre and some of the more leveraged versions of the strategy. Some of the products mentioned in this thread work better in certain situations and for certain people. The RBC Homeline can be really complex and if done the right way effective as well with the multiple mortgage and HELOC accounts. Some people prefer this complexity that may or may not yield financial benefits at the end of the day. The benefits are really tangible when you need multiple HELOC accounts to keep bad debt and good debt separate.

Other products like FirstLine's MATRIX are simpler: no mulitple mortgage or HELOC accounts. The MATRIX also does not offer variable rate on the mortgage portion. However, the pre-payment privileges are excellent at 20% anytime plus you can also increase your regular monthly payment by up to 25% so there is no need on the mortgage side to have multiple accounts - one closed and one open - just so you do not exceed your pre-payment privilege. The FirstLine Matrix also has an outstanding website where you can track your amortization and how it changes as you make pre-payments on your mortgage. All my clients love the website - it is very functional.

Now let me weigh in on the idea of fixed or variable rate mortgage. As a finacial planner I am very consciuos of risk and interest rate risk is a serious consideration in the Smith Manoeuvre or the Turbo version that I implement for my clients. While statistically speaking a discounted below Prime mortgage rate has been proven to be superior to a 5-year fixed rate mortgage over time, interest rate fluctuation creates an additional risk for my clients. Since the strategies discussed here involve risk, why increase the risk by making the entire mortgage and the HELOC and the investment loans variable rate? It is a compounding risk even more. By going at least on a portion of your debt exposure fixed rate you decrease the interest rate risk somewhat. In otherwords you hedge your bets. For this reason I am not hung up on the fixed rate portion of the FirstLine's MATRIX.

As a final thought allow me to comment on why I think it makes sense not to do the Smith Manoeuvre or the Turbo version of it by yourself. Maybe some of the participants who read this and other, related threads do not fall into this category. But the overwhelming majority of people do because the strategy is complex AND the impact on your financial well-being is huge. CEOs hire experts who advise them on complex matters and you, as the CEO of your life, probably want to have experts on your side as well. Most wealthy people do. Whatever mortgage product / lending institution you go with and whoever your financial advisor will be, it is really your decision. My clients have a smooth experience from A to Z because as an independent financial advisor and as an independent mortgage broker I am able to support them from the beginning to the end. It is a seemless process and because of that my client satisifaction is very high. Even if I have clients who do take a mortgage from another source I still support them along the way to make the best of the situation.

Let me know if you have any comments.

[Bullseye]

As a final thought allow me to comment on why I think it makes sense not to do the Smith Manoeuvre or the Turbo version of it by yourself. Maybe some of the participants who read this and other, related threads do not fall into this category. But the overwhelming majority of people do because the strategy is complex AND the impact on your financial well-being is huge. CEOs hire experts who advise them on complex matters and you, as the CEO of your life, probably want to have experts on your side as well. Most wealthy people do. Whatever mortgage product / lending institution you go with and whoever your financial advisor will be, it is really your decision. My clients have a smooth experience from A to Z because as an independent financial advisor and as an independent mortgage broker I am able to support them from the beginning to the end. It is a seemless process and because of that my client satisifaction is very high. Even if I have clients who do take a mortgage from another source I still support them along the way to make the best of the situation.

Let me know if you have any comments.

People do it themselves because the costs of a financial planner (either upfront or embedded) eat into the efficiency of the SM.

It doesn't need to be complicated, someone can just buy index funds and pay an accountant once a year to manage the tax side of it. A financial planner is more likely to put people into high MER mutual funds that pay the advisor nice commissions.

[Bick Financial Toronto]

People do it themselves because the costs of a financial planner (either upfront or embedded) eat into the efficiency of the SM.

It doesn't need to be complicated, someone can just buy index funds and pay an accountant once a year to manage the tax side of it. A financial planner is more likely to put people into high MER mutual funds that pay the advisor nice commissions.

You are right that there is a cost to a financial planner. Like anywhere else you have to pay the piper. You may cut your own hair or go to the barber instead and pay him. The basic question is value added. In your opinion there is no value added it seems and perhaps from your vantage point you are right. However, most people disagree with you.

I am confident that the strategy that I implement to my clients will outperform whatever most do-it-yourself indexers ever able to accomplish - and that's with the MER. I know where you are coming from with your indexer mentality - I've heard it before. 1998 and 1999 was another period in financial history when indexers were so confident after years of strong performance. Then came 2001 and 2002 and somehow they were all quiet while suffering double digit losses back to back. That was the time when a $100,000 investment dropped to $75,000 if you were invested in the TSX.

Similarly, the past few years have been good to indexers and that maybe just another indication that tougher times are ahead of us. Or it could be just nice and peachy for years to come and Canada will be an indexer's paradise going forward. But when tough times come most people need a coach to stay on track and not sell out at the exact worse time - that is ONE OF THE MAIN ROLES OF A FINANCIAL PLANNER.

[mjohare]

... Then came 2001 and 2002 and somehow they were all quiet while suffering double digit losses back to back. That was the time when a $100,000 investment dropped to $75,000 if you were invested in the TSX.

... But when tough times come most people need a coach to stay on track and not sell out at the exact worse time - that is ONE OF THE MAIN ROLES OF A FINANCIAL PLANNER.

First you seem to be saying that staying in the TSX in 2001-2002 would have been a mistake. Then you seem to say that sticking it out and not selling is the right thing to do. What is it?

The philosophy of Indexing is to simply stay put, keep contributing no matter what, and in the long run you should get historical rates of return (~8-10%) without losing tens or even hundreds of thousands of dollars on compounding MERs and other fees. Indexers by definition do not panic and sell off when stocks go down. Someone who does sell of when stocks dive is not a true indexer, and probably should have a financial planner. A true indexer, however, has no need for a financial planner.

I'm very skeptical of financial planners touting the value of financial planners. Especially when most "expertly" managed mutual funds aren't even able to beat the indices.

[dark169]

I'm very skeptical of financial planners touting the value of financial planners. Especially when most "expertly" managed mutual funds aren't even able to beat the indices.

That and the fact that if they where really right so much why the hell are they working/living here, shouldn't they own a nice island somewhere. :lol:

[Bullseye]

mjohare and dark169 pretty much covered everything I would have put into my response.

I'm not a die-hard indexer, but over and over again I see that 70-80% of managed funds do not beat straight index returns, so I figure the odds are not in favour of them. Perhaps a good advisor can consistently move you around to keep you in the 20-30% of managed funds that do beat the index after MER's, but that leads back to the other point...if that person is such a champ, why are they bothering with working as an advisor?

[pitz]

Then came 2001 and 2002 and somehow they were all quiet while suffering double digit losses back to back. That was the time when a $100,000 investment dropped to $75,000 if you were invested in the TSX.


One technique I use personally, and show to others, is to calculate the IRR of the dollar-cost-averaged investments over time. It is much easier to show a client that their gradual purchases of the TSX are yielding a return of, say, 8%, than it is to focus on yearly or monthly returns.

If you were averaging into the TSX from, say, 1998 through to 2001, yes, at the end, the value of the account went down, but the IRR (return on investment) still was somewhat greater than the mortgage/prime rate, and thus, the client could easily be persuaded that doing the SM was still adding value, despite the big Nortel-induced drop towards the end.

If you use a spreadsheet like Microsoft Excel, its pretty easy. Make 2 columns, one for the date of an investment, and another for the cost of an investment. Populate these columns. Then add, at the last row, the current date, and the proceeds of the investments were they sold. Use the XIRR() function in Excel to calculate the rate of return.

If the results are greater than your interest rate, then the SM is adding value. If the result is less than the interest rate, then the SM is destroying value.

This is the *only* number I deal with when I help family members invest in ETFs either to accomplish the SM, or just for normal investments. Its completely not helpful to look at the yearly returns because this doesn't reflect one's actual experience, nor does it incorporate the effects of dollar cost averaging. And the SM forces one to dollar-cost average which is very beneficial.



Similarly, the past few years have been good to indexers and that maybe just another indication that tougher times are ahead of us. Or it could


Well considering that there isn't any single TSX firm that is over 6% of the index today, its pretty hard to compare to the TSX of the late 90s where Nortel was close to 50%.

First you seem to be saying that staying in the TSX in 2001-2002 would have been a mistake. Then you seem to say that sticking it out and not selling is the right thing to do. What is it?

Nothing wrong with staying in the TSX 2001-2002 at all, *if* you bought a substantial amount of your investments before Nortel's market cap exploded in the late 90s. The people who were hurt, were those who invested a large lump-sum at the top of the market in 2000.

[Bick Financial Toronto]

One technique I use personally, and show to others, is to calculate the IRR of the dollar-cost-averaged investments over time.

You are right, IRR is the best way to measure return. However, it does not take into account volatility - fluctuations in the underlying value.

Well considering that there isn't any single TSX firm that is over 6% of the index today, its pretty hard to compare to the TSX of the late 90s where Nortel was close to 50%.

My point was that periods of above trend performance is followed by periods of underperformance. The TSX has been performing above trend line for the past 5 years.

Nothing wrong with staying in the TSX 2001-2002 at all, *if* you bought a substantial amount of your investments before Nortel's market cap exploded in the late 90s. The people who were hurt, were those who invested a large lump-sum at the top of the market in 2000.

Absolutely. Especially if someone was buying in with dollar cost averaging over time, the emotional pain was much less dramatic.

[Bick Financial Toronto]

First you seem to be saying that staying in the TSX in 2001-2002 would have been a mistake. Then you seem to say that sticking it out and not selling is the right thing to do. What is it?

The point was that indexing is more popular at certain times. 1998 was one of those times and 2006 was one of those times. Certainly sticking it out is the way to go - but most people cannot. You could be an exception.

I'm very skeptical of financial planners touting the value of financial planners. Especially when most "expertly" managed mutual funds aren't even able to beat the indices.

I am a finacial advisor so of course I am biased towards my profession. It would be impossible for me not to believe in what I am doing every day. Most people on this site prefer to focus on returns alone, but reduced volatility, tax considerations and support with the various investment strategies are also considered value added for most people. Maybe not for you, I understand, but for most people.

[Bick Financial Toronto]

That and the fact that if they where really right so much why the hell are they working/living here, shouldn't they own a nice island somewhere. :lol:

What's wrong with Canada? One of the best places in the world to live, raise kids, go to school, ski, enjoy nature... Only those damn black flies and mosquitos - I could do without them. :cheesygri

[yugrus]

What's wrong with Canada? One of the best places in the world to live, raise kids, go to school, ski, enjoy nature... Only those damn black flies and mosquitos - I could do without them. :cheesygri

Well, but you at least have earned enough dough to buy a small island, utilizing your technique, did you not?
Or at least paid down your mortgage, may be?.. Or have no debt?

[Bick Financial Toronto]

Well, but you at least have earned enough dough to buy a small island, utilizing your technique, did you not?
Or at least paid down your mortgage, may be?.. Or have no debt?

Yes.

[yugrus]

Good for you.
I've got there without external advice either.
If you're smart enough to earn your money, you should be good at managing it. There's very little room for 'financial planners', unless all you have is debt. But even in that case...

[Bick Financial Toronto]

I'm not a die-hard indexer, but over and over again I see that 70-80% of managed funds do not beat straight index returns, so I figure the odds are not in favour of them. Perhaps a good advisor can consistently move you around to keep you in the 20-30% of managed funds that do beat the index after MER's

You are right Bullseye that most fund managers do not beat the index by performance. Of course there are other considerations as well - see one of my responses above. But some investment pools have been beating the index over certain periods of time even if you focus on investment performance alone. By definition, if they want to beat the index, they have to be different from the index, which means that during certain periods they will underperform and other times they will overperform. If the investment time horizon is long enough - say 10 years or more - then a great fund manager will outperform the index with less volatility due to better diversification(so we can all sleep at night) and much better tax efficiency.

I do not believe in market timing, but I do believe in diversification. So moving the money around does not make sense unless the investment objectives have changed or the fund manager departed.

...if that person is such a champ, why are they bothering with working as an advisor?

You've touched on a very philosophical topic. It is a great feeling to be good at one's profession and the compensation is just a by-product of doing an outstanding job at one's chosen field. There are many people who make tons of money, but do they quit their field of expertise? Steve Job? Peter Munk? Doctors? Lawyers? Financial Advisors? If they quit, what would they do with their free time? Sip Pina Colada on an island? Yes, of course, but how long? A week? A month? And then what? They really love their profession, so why would they do something else that they do not love as much?

[Bick Financial Toronto]

If you're smart enough to earn your money, you should be good at managing it.

Are you sure? If someone is an excellent piano player and makes good money, she should also know how to manage it and invest it? How about a janitor? Or a doctor?

[Bick Financial Toronto]

Hey Pitz, we need your input here.

[nubbie]

I have to admit all this information is overwelming. My questions is quick and hopefully simple.

Does it make sense to use the SM on a Mortgage less that $200,000 (all the examples I see use this figure). What about a mortgage of $50,000? $100,000? over 5 years, 10 years?

I take it you would not get the same return using smaller amounts of cash, same for time period?

[petieboy]

I have to admit all this information is overwelming. My questions is quick and hopefully simple.

Does it make sense to use the SM on a Mortgage less that $200,000 (all the examples I see use this figure). What about a mortgage of $50,000? $100,000? over 5 years, 10 years?

I take it you would not get the same return using smaller amounts of cash, same for time period?

Or let's say... a $90K mortgage with 3.5 years left @ 4.44%? ;)

Any answers are appreciated!

[Bullseye]

nubbie and peteiboy - the value of the mortgage is irrelevant, in reality. The SM is essentially just borrowing to invest, when you break it down. Smith frames it as reborrowing back the principal payments against your mortgage, so that he can make the claim that you are never increasing your debt level (although never reducing it, either), from the point at which you start the SM, which is true.

There's nothing to stop you, however, from borrowing an amount exceeding your current mortgage at the time you decide to start the SM. You could just 'pretend' that you started the SM 5 years earlier with a higher mortgage balance, and go up to that amount. Or whatever amount you choose, up to what your lender will extend to you, and what level fits your risk tolerance.

See the point I'm making? The SM was designed to appeal to peoples inate dislike of taxes so that Smith could sell more investments and books, but it's really just a bit of smoke and mirrors, in essence. It's borrowing to invest, period. So borrow whatever you're comfortable with, and call it whatever pleases you.

[species5618w]

It's borrowing to invest, period. So borrow whatever you're comfortable with, and call it whatever pleases you.

That's the part I don't understand either. An unsecured LOC should do the exact same thing except for a 1% high interests, no? Can I use my money in the bank as a leverage to borrow more money and/or at a lower rate?

[Tedder]

That's the part I don't understand either. An unsecured LOC should do the exact same thing except for a 1% high interests, no? Can I use my money in the bank as a leverage to borrow more money and/or at a lower rate?

sure it will, but as you pay your principal down, you would likely need to continue asking your bank to increase your credit limit. At some point, they'll say enough is enough (of unsecured credit). A personal LOC will work for the short term, but a re-advanceable mortgage is ideal.

The more money you have in the bank, the higher your net worth is, I suppose, therefore increasing your haggling-power on your rate.

[Bullseye]

That's the part I don't understand either. An unsecured LOC should do the exact same thing except for a 1% high interests, no? Can I use my money in the bank as a leverage to borrow more money and/or at a lower rate?

You want low borrowing costs, so the higher rate unsecured LOC is less desirable.

You could use a margin account just as easily, though, and Pitz has even posted here that he gets a better than prime rate for his. So that's your 'money in the bank' there.

[sjweyman]

nubbie and peteiboy - the value of the mortgage is irrelevant, in reality. The SM is essentially just borrowing to invest, when you break it down. Smith frames it as reborrowing back the principal payments against your mortgage, so that he can make the claim that you are never increasing your debt level (although never reducing it, either), from the point at which you start the SM, which is true.

There's nothing to stop you, however, from borrowing an amount exceeding your current mortgage at the time you decide to start the SM. You could just 'pretend' that you started the SM 5 years earlier with a higher mortgage balance, and go up to that amount. Or whatever amount you choose, up to what your lender will extend to you, and what level fits your risk tolerance.

See the point I'm making? The SM was designed to appeal to peoples inate dislike of taxes so that Smith could sell more investments and books, but it's really just a bit of smoke and mirrors, in essence. It's borrowing to invest, period. So borrow whatever you're comfortable with, and call it whatever pleases you.

Yah ... seems a bit like smoke and mirrors to me. In my view simply paying down the mortgage fast is the best option to reduce interest costs that aren't tax deductable and then if you end up needing money later you can use your LOC or HELOC to bail you out while you also reduce your mortgage payments or do whatever you have to to recover.

If you want to borrow money to invest then you should do it using a 0% interest credit card if available without maxing out the CC to avoid a negative impact on your credit score.

Also, if you wish to invest money using borrowed funds ... it is probably best to do so to max out your RRSP if you are concerned about funds for retirement to obtain the tax benefits. Then you can use the rebate to immediately pay down some of the borrowed funds. Take advantage of the tax sheltered investment gains as well as the (probably) lower income and tax bracket when you later withdraw the funds during retirement. If we/you make it that long that is.

Of course, I am a noob at investing (although my father is a long time financial advisor ... but we don't talk about it all that much). Safer is better IMO. Go for a guaranteed benefit or return and take advantage of tax law (at which I'm also a noob). Feel free to pick this post apart :)

[pitz]

That's the part I don't understand either. An unsecured LOC should do the exact same thing except for a 1% high interests, no? Can I use my money in the bank as a leverage to borrow more money and/or at a lower rate?

Why would you have any money in the bank if you're doing the SM? That completely defeats the purpose.

[dark169]

Yah ... seems a bit like smoke and mirrors to me. In my view simply paying down the mortgage fast is the best option to reduce interest costs that aren't tax deductable and then if you end up needing money later you can use your LOC or HELOC to bail you out while you also reduce your mortgage payments or do whatever you have to to recover.

If you want to borrow money to invest then you should do it using a 0% interest credit card if available without maxing out the CC to avoid a negative impact on your credit score.

Also, if you wish to invest money using borrowed funds ... it is probably best to do so to max out your RRSP if you are concerned about funds for retirement to obtain the tax benefits. Then you can use the rebate to immediately pay down some of the borrowed funds. Take advantage of the tax sheltered investment gains as well as the (probably) lower income and tax bracket when you later withdraw the funds during retirement. If we/you make it that long that is.

Of course, I am a noob at investing (although my father is a long time financial advisor ... but we don't talk about it all that much). Safer is better IMO. Go for a guaranteed benefit or return and take advantage of tax law (at which I'm also a noob). Feel free to pick this post apart :)


First of all you put down all this advice, then clearly state your a noob. The whole idea of the smith plan is to stop waiting to pay off the mortgage before investing, which is the typical "canadian way" which leaves you poor and 20 years behind.

The SM allows you to invest today at a lower interest rate then your mortgage. Sure you could use 0% CC's but I haven't seen a 0% card that has a 20 year 0% rate...

The idea is if your current plan is to be mortgage free in 15 years, in 15 years you have zero mortgage and thats it. With the SM you have zero mortgage, a loan/or LOC for $X but an investment account with $X + Y, so you could sell everything and at year 15 your Y ahead.

[Bick Financial Toronto]

You want low borrowing costs, so the higher rate unsecured LOC is less desirable.

You could use a margin account just as easily, though, and Pitz has even posted here that he gets a better than prime rate for his. So that's your 'money in the bank' there.

The cost of borrowing certainly important, although it is somewhat diminished by the fact that it is tax deductible. Other factors that you may consider is whether it is a margin call loan. Loans with margin call protection cost slightly more. The amount of leverage that is allowed / offered will also increase the cost of loan generally speaking.

For example, you may have a 1 to 1, 1 to 2 or 1 to 3 investment loan where the first number is your equity portion and the second figure is the loan portion. So with a 1 to 2 investment loan you are getting twice as much loan as your equity.

[Bick Financial Toronto]

Of course, I am a noob at investing (although my father is a long time financial advisor ... but we don't talk about it all that much). Safer is better IMO. Go for a guaranteed benefit or return and take advantage of tax law (at which I'm also a noob). Feel free to pick this post apart :)

Funny...

[sleepyguy]

wow deja vu... we spoke to a very compentant financial advisor late last year and this is EXACTLY what he said. +1 Bullseye, you seem to quite knowledgable amongst rfd'ers... no worries I'm not hitting on you or anything... lol ;)

nubbie and peteiboy - the value of the mortgage is irrelevant, in reality. The SM is essentially just borrowing to invest, when you break it down. Smith frames it as reborrowing back the principal payments against your mortgage, so that he can make the claim that you are never increasing your debt level (although never reducing it, either), from the point at which you start the SM, which is true.

There's nothing to stop you, however, from borrowing an amount exceeding your current mortgage at the time you decide to start the SM. You could just 'pretend' that you started the SM 5 years earlier with a higher mortgage balance, and go up to that amount. Or whatever amount you choose, up to what your lender will extend to you, and what level fits your risk tolerance.

See the point I'm making? The SM was designed to appeal to peoples inate dislike of taxes so that Smith could sell more investments and books, but it's really just a bit of smoke and mirrors, in essence. It's borrowing to invest, period. So borrow whatever you're comfortable with, and call it whatever pleases you.

[Bick Financial Toronto]

The SM was designed to appeal to peoples inate dislike of taxes so that Smith could sell more investments and books, but it's really just a bit of smoke and mirrors, in essence. It's borrowing to invest, period. So borrow whatever you're comfortable with, and call it whatever pleases you.

Bullseye, to be fair to Fraser Smith, he has brought the idea of leveraged investing into the main stream. Without his efforts there would be no concept called Smith Manoeuvre and we would not have this thread and discussion either. Give the man credit where it is due. And yes, he is probably selling more books and more investments as a result of his efforts. Is there anything wrong with that as long as his clients benefit? Self interest is the engine of capitalism.

You call his book smoke and mirrors and for a financially trained person perhaps it is. But the book was meant for people who are not familiar with the concept at all. The repetitive nature of the book does not hurt: it drives the point home so people who are not familiar with personal financial can understand it.

[Bullseye]

Bullseye, to be fair to Fraser Smith, he has brought the idea of leveraged investing into the main stream. Without his efforts there would be no concept called Smith Manoeuvre and we would not have this thread and discussion either. Give the man credit where it is due. And yes, he is probably selling more books and more investments as a result of his efforts. Is there anything wrong with that as long as his clients benefit? Self interest is the engine of capitalism.

You call his book smoke and mirrors and for a financially trained person perhaps it is. But the book was meant for people who are not familiar with the concept at all. The repetitive nature of the book does not hurt: it drives the point home so people who are not familiar with personal financial can understand it.

My post was not meant to disparage Fraser Smith, or his manouvre, I was just trying to explain the actual essence of the SM.

[Bick Financial Toronto]

My post was not meant to disparage Fraser Smith, or his manouvre, I was just trying to explain the actual essence of the SM.

You are way overqualified for that book. :)

[brunes]

My post was not meant to disparage Fraser Smith, or his manouvre, I was just trying to explain the actual essence of the SM.

From my POV though this is the whole essence of the "manovre" - to make your mortgage interest tax deductible.

If you are just borrowing money to invest that is no longer the SM, it is simply leveraged investing.

EDIT: I think the allure of the SM is that, the majority of Canadians want to pay off their mortgage. But the interest is not tax deductible like it is in the US. By doing the SM they can pay their mortgage down and claim the interest. Once the investments reach the point where the mortgage can be paid off, the SM is complete, and the people can totally cash out their investments and have both a paid off mortgage much faster. This is what I expect most people who engage in the SM end up wanting to do - they have no desire to keep their investments after the mortgage is able to be paid off. To them it is just a faster way to get to that goal.

If someone is just using their mortgage as leverage and does not plan to pay it off at the end that is not the SM. The SM is very specifically a way to make your mortgage tax deductible. That's the difference to me.

[Bullseye]

From my POV though this is the whole essence of the "manovre" - to make your mortgage interest tax deductible.

If you are just borrowing money to invest that is no longer the SM, it is simply leveraged investing.

Unless you already have non-registered investments, then simple leveraged investing is indeed all that it is.

Not that that is necessarily a bad thing.

[sjweyman]

First of all you put down all this advice, then clearly state your a noob. The whole idea of the smith plan is to stop waiting to pay off the mortgage before investing, which is the typical "canadian way" which leaves you poor and 20 years behind.

The SM allows you to invest today at a lower interest rate then your mortgage. Sure you could use 0% CC's but I haven't seen a 0% card that has a 20 year 0% rate...

The idea is if your current plan is to be mortgage free in 15 years, in 15 years you have zero mortgage and thats it. With the SM you have zero mortgage, a loan/or LOC for $X but an investment account with $X + Y, so you could sell everything and at year 15 your Y ahead.

Right ... it makes sense. Never said it didn't. Just more risk involved ... that's all. I have a $20,000 LOC attached to my mortgage. I could take all that money and invest it and most likely make a profit because of the tax advantages and appreciation ... but then I would be shouldering a greater risk that if the market tanks or we go through another huge depression like 1929.

I also point out that I'm a noob ... because I don't want people taking any advice I might offer seriously without further research. However, my ideas or thoughts might serve as a starting point or a basis for asking more questions and therefore aren't completely useless.

[Bick Financial Toronto]

This is what I expect most people who engage in the SM end up wanting to do - they have no desire to keep their investments after the mortgage is able to be paid off. To them it is just a faster way to get to that goal.
Brunes, that's not necesserily so. Depending on a number of factors including one's risk tolerance, keeping the investment going even after the mortgage is converted could be a superior financial strategy.

[pitz]

Brunes, that's not necesserily so. Depending on a number of factors including one's risk tolerance, keeping the investment going even after the mortgage is converted could be a superior financial strategy.

Exactly! I mean, once you've paid off your mortgage, you'll still need to build up a retirement portfolio. Paying down the debt associated with the SM, ie: reducing leverage, while keeping the (hopefully wisely selected) investments intact is an excellent idea. Collapsing the whole plan, right then and there, would probably create a huge tax liability.

The raison d'etre of the the SM is to defer taxes in essence, and to profit from that tax deferral by accumulating capital gains. At least in Canada, historically, there hasn't been a lot gained by investing in equity versus investing in corporate debt (the equity risk premium in Canada, historically, has been minimal), so the gains almost entirely are expected to come from tax arbitrage alone.

Of course, one would want to have *all* of their debt paid off before they start building a fixed income (or cash) portfolio.

[petieboy]

wow deja vu... we spoke to a very compentant financial advisor late last year and this is EXACTLY what he said. +1 Bullseye, you seem to quite knowledgable amongst rfd'ers... no worries I'm not hitting on you or anything... lol ;)

+1 .. I kept thinking to myself the SM can't really be as simple as I think it is - until Bullseye's post confirmed it.

[sabby]

Hello,

I'm hoping to receive some advice as to whether the RBC Homeline is a good mortgage product for me. This will be my second mortgae with RBC. My first was not a Homeline mortgage. Now that I've purchased a new home, my mortgage specialist is suggesting that I take the Homeline mortgage. The Homeline mortage seems more complicated from the conventional mortgage I originally had. From what I've read it seems to be a good option for people who have additional loans, loc, and/or credit card balances to pay-off. In my case, my downpayment is approx. 40% and I have no other outstanding loans or credit cards to pay-off. So, I'm not sure what my benefits will be from having this type of mortgage, other than being able to split the mortgage amount between a variable and fixed rate. Would I be better off with a conventional closed variable rate? Does anyone know what the negative aspects are to having a Homeline mortage?

[oyster_777]

Question.

Can this smith maneouvre work with a rental property?

Both myself and girlfriend own our houses. Both houses are rental units now. We also rent (blended family).

What are the drawbacks (if any) from following the advice on this thread? Her mortgage comes due 1st of July 2008... mine is variable rate.

She has approx $100k equity and myself $250k @ 75% of current house value in equity.

Thanks

[circa76]

Hello,

I'm hoping to receive some advice as to whether the RBC Homeline is a good mortgage product for me. This will be my second mortgae with RBC. My first was not a Homeline mortgage. Now that I've purchased a new home, my mortgage specialist is suggesting that I take the Homeline mortgage. The Homeline mortage seems more complicated from the conventional mortgage I originally had. From what I've read it seems to be a good option for people who have additional loans, loc, and/or credit card balances to pay-off. In my case, my downpayment is approx. 40% and I have no other outstanding loans or credit cards to pay-off. So, I'm not sure what my benefits will be from having this type of mortgage, other than being able to split the mortgage amount between a variable and fixed rate. Would I be better off with a conventional closed variable rate? Does anyone know what the negative aspects are to having a Homeline mortage?

I don't think they are any... aside from a slightly higher legal fee that RBC won't cover.

I've got the homeline mortgage, and I've got three components; one is the HELOC, second is a closed variable and the third is an open variable.

I don't have any other debts either, and it works well for me since the available HELOC limit goes up with each payment.

[sslinn]

Question.

Can this smith maneouvre work with a rental property?

Both myself and girlfriend own our houses. Both houses are rental units now. We also rent (blended family).

What are the drawbacks (if any) from following the advice on this thread? Her mortgage comes due 1st of July 2008... mine is variable rate.

She has approx $100k equity and myself $250k @ 75% of current house value in equity.

Thanks

Absolutely, and you can go to 80% Loan to Value without paying CHMC premiums. If you are thinking about this PM me, I have a thought that may save you some cash.

[oyster_777]

you have a pm.

[Bick Financial Toronto]

Question.

Can this smith maneouvre work with a rental property?

Both myself and girlfriend own our houses. Both houses are rental units now. We also rent (blended family).

What are the drawbacks (if any) from following the advice on this thread? Her mortgage comes due 1st of July 2008... mine is variable rate.

She has approx $100k equity and myself $250k @ 75% of current house value in equity.

Thanks

Your rental property is already an investment and thus the interest costs are already tax deductible. In other words the mortgage that you have on the rental property is "good debt". You could still use the equity in your home for investment purposes through a HELOC, but it is just plain leveraged investing. The Smith Manoeuvre will not apply in your case.

Given the run up in home prices in the Alberta reagion it may definitely make sense to refinacne and lock in a nice HELOC in case the price appreciation does not last forwever.

[Bick Financial Toronto]

Hello,

I'm hoping to receive some advice as to whether the RBC Homeline is a good mortgage product for me. This will be my second mortgae with RBC. My first was not a Homeline mortgage. Now that I've purchased a new home, my mortgage specialist is suggesting that I take the Homeline mortgage. The Homeline mortage seems more complicated from the conventional mortgage I originally had. From what I've read it seems to be a good option for people who have additional loans, loc, and/or credit card balances to pay-off. In my case, my downpayment is approx. 40% and I have no other outstanding loans or credit cards to pay-off. So, I'm not sure what my benefits will be from having this type of mortgage, other than being able to split the mortgage amount between a variable and fixed rate. Would I be better off with a conventional closed variable rate? Does anyone know what the negative aspects are to having a Homeline mortage?

Plus you will have a HELOC that gives you financial flexibility if you ever need any. You never know, you may need to do an unexpected home renovation, finance a car, buy another property or do the tax deductible mortgage strategy.

[oyster_777]

Your rental property is already an investment and thus the interest costs are already tax deductible. In other words the mortgage that you have on the rental property is "good debt". You could still use the equity in your home for investment purposes through a HELOC, but it is just plain leveraged investing. The Smith Manoeuvre will not apply in your case.

Given the run up in home prices in the Alberta reagion it may definitely make sense to refinacne and lock in a nice HELOC in case the price appreciation does not last forwever.

Thanks for the reply.

You are saying the interest from my capital investments through the Rental property HELOC are not deductible? Did i understand correctly? Why wouldnt it be deductible?

Thanks.

[Bick Financial Toronto]

Thanks for the reply.

You are saying the interest from my capital investments through the Rental property HELOC are not deductible? Did i understand correctly? Why wouldnt it be deductible?

Thanks.

It is tax deductible if you invest it according to the CRA rules. It has nothing to do with the type of property you have (rental or primary residence) but instead what you use the loan for. If you invest it to earn interest and dividend income then the interest cost is tax deductible. Otherwise it is not.

I hope this helps.

[homestar]

I beleive it does matter what type of property it is. A rental property is expected to generate an income therefor under CRA ruled any interest paid on money borrowed to acquire that investment property is tax deductible. The interest you pay on money borrowed to acquire your principle residence is not. If you borrow money against your principle residence for the purpose of investing then the interest on that portion would be tax deductible providing that the money was invested in something that generates an income or has the anticpation of generating an income. The money cannot be used for RRSP or investments that will only provide a capital gain.

Hope this helps

[Bick Financial Toronto]

I beleive it does matter what type of property it is. A rental property is expected to generate an income therefor under CRA ruled any interest paid on money borrowed to acquire that investment property is tax deductible. The interest you pay on money borrowed to acquire your principle residence is not. If you borrow money against your principle residence for the purpose of investing then the interest on that portion would be tax deductible providing that the money was invested in something that generates an income or has the anticpation of generating an income. The money cannot be used for RRSP or investments that will only provide a capital gain.

Hope this helps

oyster_777 was referring to the HELOC. Read his response first then mine.

I hope this helps.

[florch]

Now that some of us have been doing this for a while, does anyone have revelations as to the pluses or minuses of the mortgage they are using?

I'm using M1. I've also used the MNBA 15 month 0% to pay off part of the mortgage. One downside is that I'm paying prime on the whole works except for a small portion locked in at P-0.6%. For my situation this isn't as bad as it sounds as the mortgage portion is now about 1/3 and heloc at 2/3.

The fee is still $14/mo (tax deductible) which sucks, but is set off from my perspective by the fact that I don't need to keep an emergency fund. Typically, I'd have kept $5k aside. That saves $25 a month in interest. Tax free savings. These are things that I'm sure I've posted else where, but believe they bear repeating if we're to try to compare the products again with some hindsight or new products in mind.

The plus side is how slick it is to operate: automatically increases your LOC appropriately, easily track interest payments by using sub accounts - set up an sub account for investments. Easily transfer dividend payments right into the account from my TDW account.

So please, provide your reviews of your own products. I'd like to hear from Matrix or STEP users in particular, but any product review might be revealing.

[BillyParadise]

Short review on BMO Readiline - it works as advertised. I have P-0.75 open variable on the mortgage, prime on the LOC. You can not capitalize interest on the HELOC - you have to transfer it manually. You can have multiple LOC accounts tied to the same Readiline.

You should count on opening up a BMO chequing account if you opt for the Readiline - you need one to get online banking. BMO has a few online quirks with respect to their LOCs - you can't just transfer money to/from them as you can with CIBC. You have to "request an advance" and wait a day. Similarly, you can't transfer money back - you do it as a bill payment.

BP

[florch]

Thanks BP

I am able to transfer back and forth from M1 to TD or PC, and use bill payments to add to my TDW account, and TDW has set up an "income account" to transfer dividends to M1.

What (regular banking) fees do you pay monthly with BMO? I could just about ditch TD($4.95, and keep TDW), but I have other business there plus find it is the most dependable bank when I'm overseas, which I am more than I thought I'd be. So that seems to be self justifying, plus convenient.

[BillyParadise]

I believe the basic plan is $3.50 or $4.00 with BMO.

I live on my credit cards, and pay my pre-auth bills through a LOC, so a basic plan works well for me. 3 bills a month, 2-3 cheques in. Easy.

[homestar]

I use Firstline's Matrix for my Smitn Man - I have found it is the easiest. Online access makes it easy to move the funds around, no need to call the bank for anything. You can also have your chequing accounts with any bank you like such as PC with no fees. I have always found that dealing directly with banks only benefits the bank.

[florch]

I don't know much about Firstline.

With Firstline do you need to go through a planner? What are the interest rates for mortgage and LOC? What are the fees both for set up, and monthly? (sorry for the inquisition;)

[oyster_777]

I don't know much about Firstline.

With Firstline do you need to go through a planner? What are the interest rates for mortgage and LOC? What are the fees both for set up, and monthly? (sorry for the inquisition;)

We just finished the paper work for our Firstline Matrix Mortgage with attached HELOC.

There is a RFD member here Sgozali who signed myself and my girlfriend up for Firstline. I have nothing but good things about the professionalism and knowledge that was provided to us. I would highly recommend contacting her for more info. There are several mortgage programs to choose from (variable, fixed, etc..) we ended up going with Variable less -0.6 from prime. Zero fees to set this up (except for the normal lawyers and banks).

We are currently calculating our financial strategy how best to use our HELOC. So far we plan to invest in "Super" flow through shares to gain a Tax advatage for 2008 and roll that Tax refund from next year back into our mortgages (allowed 20% prepayment). Also plan to take another chunk of the HELOC and invest in a couple of Dividend producing stocks... and again roll that $$$ back into the mortgage. We anticipate to be mortgage free (if we stick to the program) and have a sizeable cash account in 10-15 years from now.

Oyster_777

[florch]

Thanks Oyster

Do you plan to self direct your investments?

[oyster_777]

Flow through shares through a planner i found online. Stocks i will manage myself.


Thanks Oyster

Do you plan to self direct your investments?

[thegradas]

How does Matrix work with SM? Do you have sub-accounts with Matrix? If I'm not wrong, CRA requires separate "accounting".

Is Matrix better than National Bank's All-in-One?

Thanks in advance for any opinions.




We just finished the paper work for our Firstline Matrix Mortgage with attached HELOC.

There is a RFD member here Sgozali who signed myself and my girlfriend up for Firstline. I have nothing but good things about the professionalism and knowledge that was provided to us. I would highly recommend contacting her for more info. There are several mortgage programs to choose from (variable, fixed, etc..) we ended up going with Variable less -0.6 from prime. Zero fees to set this up (except for the normal lawyers and banks).

We are currently calculating our financial strategy how best to use our HELOC. So far we plan to invest in "Super" flow through shares to gain a Tax advatage for 2008 and roll that Tax refund from next year back into our mortgages (allowed 20% prepayment). Also plan to take another chunk of the HELOC and invest in a couple of Dividend producing stocks... and again roll that $$$ back into the mortgage. We anticipate to be mortgage free (if we stick to the program) and have a sizeable cash account in 10-15 years from now.

Oyster_777

[cannon_fodder]

Short review on BMO Readiline - it works as advertised. I have P-0.75 open variable on the mortgage, prime on the LOC. You can not capitalize interest on the HELOC - you have to transfer it manually. You can have multiple LOC accounts tied to the same Readiline.

You should count on opening up a BMO chequing account if you opt for the Readiline - you need one to get online banking. BMO has a few online quirks with respect to their LOCs - you can't just transfer money to/from them as you can with CIBC. You have to "request an advance" and wait a day. Similarly, you can't transfer money back - you do it as a bill payment.

BP

BP,

I just signed up for Readiline and I'm nearing the time where I will be dipping into the HELOC for investing. I'll be taking the dividends from the investments and plowing them through the mortgage and reborrowing. We already had accounts with BMO so we didn't have to do anything new there.

What I'm interested in is a bit more detail as to how you move money in/out of your accounts, the delays, how you actually capitalize the interest, and any other 'gotchas' I should be aware of.

I will be using Interactive Brokers to hold our investments and I've never dealt with them before. I'm preparing myself for 2 week lapse between transferring money from IB to BMO Readiline, reborrow principal and transfer back to IB for investing.

Any help you can provide would be greatly appreciated.

[BillyParadise]

Good morning CannonFodder,

Thanks, by the way, for your SmithMan excel spreadsheet. Very useful.

My SM investment via readiline is very simple - I have an automated monthly debit which goes directly to my investments.

As to capitalizing the interest, I haven't done that yet, as I prepay my mortgage by more than the interest. But it would be quite simple - just remind yourself to go online a couple of days before the end of the month and go to Transfers / Cash Advance, and advance the money to the account from where your mortgage is paid. It's always been done within one working day, so two or three days should be more than enough time.

I can't speak to the time delay between IB and BMO, but two weeks sounds excessive.

BP

[oyster_777]

BP,

I just signed up for Readiline and I'm nearing the time where I will be dipping into the HELOC for investing. I'll be taking the dividends from the investments and plowing them through the mortgage and reborrowing. We already had accounts with BMO so we didn't have to do anything new there.

What I'm interested in is a bit more detail as to how you move money in/out of your accounts, the delays, how you actually capitalize the interest, and any other 'gotchas' I should be aware of.

I will be using Interactive Brokers to hold our investments and I've never dealt with them before. I'm preparing myself for 2 week lapse between transferring money from IB to BMO Readiline, reborrow principal and transfer back to IB for investing.

Any help you can provide would be greatly appreciated.

Why did you pick Interactive Brokers as the Investment account? Why not BMO investorline?

[oyster_777]

How does Matrix work with SM? Do you have sub-accounts with Matrix? If I'm not wrong, CRA requires separate "accounting".

Is Matrix better than National Bank's All-in-One?

Thanks in advance for any opinions.

Have mortgage and heloc. Two seperate entities. As i pay down the mortgage HELOC increases automatically.

Im in the process of trying to figure out the best way to link all the accounts together so transfer of $$$ is free and time efficient. Im thinking of using BMO Investorline for my stock account as i can Transfer $$$ directly from Firstline to PC Financial and then use Bill payment to send $$$ to BMO Cash Account.

Not sure if BMO has the ability to send dividend payments to PC Financial or if they send a cheque... some more homework to do...

[cannon_fodder]

Why did you pick Interactive Brokers as the Investment account? Why not BMO investorline?

We used to deal with BMO Investorline. I didn't like them nearly as much as E*Trade (especially their fees). But, the main reason why I chose IB is that their margin interest rates are less than prime for amounts > $105k.

[cannon_fodder]

Good morning CannonFodder,

Thanks, by the way, for your SmithMan excel spreadsheet. Very useful.

My SM investment via readiline is very simple - I have an automated monthly debit which goes directly to my investments.

As to capitalizing the interest, I haven't done that yet, as I prepay my mortgage by more than the interest. But it would be quite simple - just remind yourself to go online a couple of days before the end of the month and go to Transfers / Cash Advance, and advance the money to the account from where your mortgage is paid. It's always been done within one working day, so two or three days should be more than enough time.

I can't speak to the time delay between IB and BMO, but two weeks sounds excessive.

BP

Thanks, BP. If you have an automated monthly debit, and you're prepaying the mortgage by more than the HELOC interest and you're not capitalizing it, then I'm assuming it is a fixed debit amount which is less than the principal paydown.

[BillyParadise]

That's right. My FA suggested I build it up to $500-$1000 just in case there's ever a glitch - seemed reasonable.

[FrugalTrader]

BP,

I just signed up for Readiline and I'm nearing the time where I will be dipping into the HELOC for investing. I'll be taking the dividends from the investments and plowing them through the mortgage and reborrowing. We already had accounts with BMO so we didn't have to do anything new there.

What I'm interested in is a bit more detail as to how you move money in/out of your accounts, the delays, how you actually capitalize the interest, and any other 'gotchas' I should be aware of.

I will be using Interactive Brokers to hold our investments and I've never dealt with them before. I'm preparing myself for 2 week lapse between transferring money from IB to BMO Readiline, reborrow principal and transfer back to IB for investing.

Any help you can provide would be greatly appreciated.

Cannon, my setup is pretty much the same as yours. With BMO, they will automatically withdraw the required HELOC payment from an account of your choosing - the BMO account may be easiest. From there, if you want to capitalize the interest, you simply do a cash advance from your HELOC to your chequing account. It should take about 1-2 days max.

From there, you should set your IB up to withdraw funds from your HELOC directly. This can be done via IB's "account" page where withdrawals/deposits are requested.

IB has a great interface, very powerful, but make sure to practice on the demo first.

FT

[Bick Financial Toronto]

I don't know much about Firstline.

With Firstline do you need to go through a planner? What are the interest rates for mortgage and LOC? What are the fees both for set up, and monthly? (sorry for the inquisition;)

FirstLine has just changed their rates and Matrix set up just a few days ago. They do not offer variable rates anymore on the closed portion of the mortgage and their fixed rates are not very competitive at the present time. The HELOC is at prime.

[sgozali]

FirstLine has just changed their rates and Matrix set up just a few days ago. They do not offer variable rates anymore on the closed portion of the mortgage and their fixed rates are not very competitive at the present time. The HELOC is at prime.

This is not true. Firstline still allows basic adjustable or variable rate mortgages on the closed portion of Matrix. What they don't allow is their Standard Designer variable or their teaser rate products to be on the Matrix.

[Tedder]

This is not true. Firstline still allows basic adjustable or variable rate mortgages on the closed portion of Matrix. What they don't allow is their Standard Designer variable or their teaser rate products to be on the Matrix.

what is their discount off prime for their basic adjustable or variable rate on the fixed portion?

[sgozali]

They just reduced the discount to prime - 0.3.

[Bick Financial Toronto]

what is their discount off prime for their basic adjustable or variable rate on the fixed portion?

In theory you can still get it, but why would anyone want it at Prime-0.30%? That makes this mortgage product completely uncompetitive. You can get the same structure at Prime-0.60% or better from other lenders. I like the FirstLine website myself, but why pay the hefty premium?

[nfuz]

Ok, So 2 questions...

My understanding of the Smith Maneuver is from:

http://www.milliondollarjourney.com/the-smith-manoeuvre-a-wealth-strategy-part-1.htm

Why do they say: "3. Use the HELOC portion of your mortgage to invest in income producing entities like dividend paying stocks or rental property."

Can you not invest in a GIC or something?

Secondly: Do you dump your entire paychecks in the mortgage and live off part of the HELOC that you haven't already invested? Or do you still use part of your regular paychecks towards the necessities, and only pay the mortgage as needed, leaving the HELOC for investments only? Option2 makes sense to me... please clarify.

Thanks

[pitz]

Can you not invest in a GIC or something?


Well there's nothing stopping you from investing in a GIC, but you wouldn't make any money from doing so; it would be a loss.

The SM works because of two factors;

a) An arbitrage spread between your cost of borrowing and your return on investment;
b) A tax arbitrage gain because you are paying 'income' to your lender, but you are collecting 'dividends' or 'capital gains' on your investments.

A GIC satisfies neither a) nor b).

(and real estate is just a horrible thing to buy with the SM for various reasons..)


Secondly: Do you dump your entire paychecks in the mortgage and live off part of the HELOC that you haven't already invested? Or do you still use part of your regular paychecks towards the necessities, and only pay the mortgage as needed, leaving the HELOC for investments only? Option2 makes sense to me... please clarify.


Well, basically, as you progress in the SM, the SM investments themselves will be paying dividends.

The goal, ultimately, is to put your entire paycheque onto the non-deductible mortgage, 'capitalize' the interest on the HELOC, and live exclusively off of the dividends generated by your investments, which can be removed without tax consequences, from your investment account.

I believe this concept is called "re-earned" income.

Practically speaking, most people won't be able to implement this optimization until quite late in the SM though, unless they have relatively low expenses.

But, let's say that someone (not a recommendation) invested 100% of their SM funds into the Boston Pizza Royalty Trust, an income trust that pays roughly a 10% income dividend (the rest is "return of capital"). And they make $60k/year, and spend $30k/year.

After a person reaches $300k of investments under the SM, assuming its all invested in BPF.UN, they'll have a stream of $30k/year income. So ideally, they'd toss their entire $60k/year paycheque against the remaining non-deductible mortgage, and 'live' exclusively on the $30k/year of dividends provided by the BPF.UN shares, only re-investing amounts that are designated 'return of capital', so as to not impair the deductibility of the loan used to buy the funds.

[nfuz]

But, what happens if the stocks, and these "trust funds" (boston pizza for example), that you buy, suddenly stop paying dividends? After all, a corporation isn't obliged to do so.

Or worse, what happens if the share prices tank....

[AllWheelDrift]

But, what happens if the stocks, and these "trust funds" (boston pizza for example), that you buy, suddenly stop paying dividends? After all, a corporation isn't obliged to do so.

Or worse, what happens if the share prices tank....
As long as the dividends keep coming the share price is irrelevant. Also, I think those income trust funds are obliged to keep paying dividends based on the cashflow.

Anyhow, pitz was just giving an example using a high dividend paying investment. Naturally you wouldn't want to put all your investments in one place and he never said there was no risk.

SM only makes sense if you do take risk though, because as pitz pointed out, if you invest in GICs you are guaranteed to lose money since GIC interest < loan interest. If you take the taxes into consideration, the tax rate on GIC interest is your marginal tax rate, and your loan interest generates tax deductions at your marginal tax rate. If you're talking Canadian dividends, they are taxed much lower, so even if your dividend payout is a bit lower than your loan interest you still come out ahead.

[pitz]

But, what happens if the stocks, and these "trust funds" (boston pizza for example), that you buy, suddenly stop paying dividends? After all, a corporation isn't obliged to do so.

Or worse, what happens if the share prices tank....

Well, obviously you diversify enough so that a single firm experiencing losses won't hurt you. I used BPF.UN as an example, but I wouldn't suggest you allocate any significant amount of your portfolio to it.

There is the risk of a correlated drop in both bond prices, as well as stock prices. That's the risk thats in the SM.

As far as share prices are concerned, unless you borrowed on margin to pay for your share purchases, you really shouldn't care, as long as the dividends keep rolling in, and as long as they are high enough and/or grow fast enough to keep up with the interest expense that you will be incurring, once all the taxes are netted out.

There's another huge thread on the SM, I suggest that you read it and post to it instead of this one if you have general questions concerning the theory of the SM.

[Bick Financial Toronto]

Flow through shares through a planner i found online. Stocks i will manage myself.

Flow throughs have been very popular lately as their performance has been excellent recently. They are tied to energy, so it is a very narrow, sector dependent investment. Are you not concerned about diversification? Have you thought about the "recency effect"? Meaning that when an investment class does well for a number of years in a row, that is generally a sign that it may not do as well going forward?

Investment selection is the most critical aspect of the Smith Manoeuvre and you say that you will manage the stock selection yourself? Not impossible, although the cards are stacked against you.

[Bick Financial Toronto]

Why do they say: "3. Use the HELOC portion of your mortgage to invest in income producing entities like dividend paying stocks or rental property."

I don't know why they say that. I also suggest return of capital investments in corporate class balanced funds. The advantages are: stable distribution, often no income taxes to be paid at year end, professional management of your investments and highly diversified portfolio. The drawbacks are that you have to account for a declining adjusted cost base when it comes time for your interest deductions and you pay for the diversification and professional management through the fund's MER. But you do have to pay the piper one way or another...

[florch]

bump

Given my recent disenchantment with M1, I'd like anyone's experience, recent findings.

[ghostryder]

I don't know why they say that. I also suggest return of capital investments in corporate class balanced funds. The advantages are: stable distribution, often no income taxes to be paid at year end, professional management of your investments and highly diversified portfolio. The drawbacks are that you have to account for a declining adjusted cost base when it comes time for your interest deductions and you pay for the diversification and professional management through the fund's MER. But you do have to pay the piper one way or another...

Because if you borrow to invest in something that cannot pay interest, income or dividends the interest on the borrowed money IS NOT DEDUCTABLE. So if you borrow to invest it a corporate class MF that cannot pay out anything but capital gains you cannot deduct the interest. This would depend on how the MF is structured.

[BillyParadise]

bump

Given my recent disenchantment with M1, I'd like anyone's experience, recent findings.

Nothing's really changed, except variable mortgage rate offers have increased about 1.5-1.9% over the last month or two (banks were offering P-0.5 to 0.9, and are now mostly at P+1). So switching from M1 might not be the best bet right now.

The Matrix mortgage was discontinued, then resurrected, I think. I check canadianmortgagetrends.com for this kind of info.

BP

[maggieandyaothecats]

I'm using the Scotia Total Equity Plan, and its working out quite well. I paid nothing to get it set up, I don't have to have an account with Scotia, and I got a competitive interest rate, prime-0.85% on the mortgage portion, prime on the LOC portion. It works well for the SM because your LOC limit goes up as your mortgage principal goes down. I set this up two years ago though.


i'm very curious about this manoevere as I'm a complete noob. Please bear with me as I'm trying to understand this through my situation.

My mortgage is currently with Scotia, and I finally have some equity to get a loan. I only have an accoutn with Questrade for trading and buyiong stock.

1. Suppose I get the loan, do I just keep taking money out of this line of credit to purchase stock within Questrade, or do I need a Scotia Mcleod account?
2. What do I do with a $10k secured line of credit? Say monthly interest payments on the loan is $50, am I supposed to be really investing $9550 with $50 to "recapitalize" that loan payment?

[sslinn]

www.milliondollarjourney.com is an excellent reference and you can also buy the book.

[maggieandyaothecats]

www.milliondollarjourney.com is an excellent reference and you can also buy the book.

Thanks, but I wanted some advice specific to my situation. MDJ is exactly where I hearde of this concept

[Bullseye]

i'm very curious about this manoevere as I'm a complete noob. Please bear with me as I'm trying to understand this through my situation.

My mortgage is currently with Scotia, and I finally have some equity to get a loan. I only have an accoutn with Questrade for trading and buyiong stock.

1. Suppose I get the loan, do I just keep taking money out of this line of credit to purchase stock within Questrade, or do I need a Scotia Mcleod account?
2. What do I do with a $10k secured line of credit? Say monthly interest payments on the loan is $50, am I supposed to be really investing $9550 with $50 to "recapitalize" that loan payment?

1. Yes, just transfer it to Questrade. Keep good records, and don't mix any personal stuff in there.

2. You don't have to recapitalize, just depends to what degree you want to implement the strategy. You can pay the interest out of your regular cash flow, just track everything for taxes. If you do recapitalize, you'll need to have enough room on the line of credit to pay the interest every month going forward, not just one month, as you've indicated.

[Bick Financial Toronto]

2. You don't have to recapitalize, just depends to what degree you want to implement the strategy. You can pay the interest out of your regular cash flow, just track everything for taxes. If you do recapitalize, you'll need to have enough room on the line of credit to pay the interest every month going forward, not just one month, as you've indicated.

Yes, one disadvantage of the Scotia mortgage is that your HELOC does not increase automatically as you pay down the mortgage. If it did, then you could capitalize the interest costs, because your regular mortgage payment would always create extra room on your HELOC. However, periodically you could take the time and effort and line up at your friendly banker and ask for an increase in your HELOC. They do it without any problems, it is just a drag.

[sslinn]

I think the Step Product now automatically advances. Call your rep!

[Bick Financial Toronto]

Existing Scotia STEP clients will have to go to their friendly banker and get the HELOC increase manually. Or they can ask Scotia to automate the HELOC limit increase, but they have to pay a fee. It was an inferior mortgage/HELOC product all the way through.

I wonder how existing Scotiabank clients feel about their HELOC going from Prime to Prime+1%. See the discussion:

http://www.redflagdeals.com/forums/showthread.php?t=746827

Other banks have not increased the HELOC for existing mortgages, which of course does not mean that they will not do so in the future. However, none of the mortgages I've ever done had the sneaky term adjustment factor included in the mortgage contract, and that makes it much harder to increase the HELOC rate half way through the mortgage term.

[poop_on_you]

I have some question related to the Smith Maneuver:

As a sub contractor, I have a corporation set up and I pay my own salary(T4, not T4A) from the corporation's revenue.

If I buy a house under my name, and I rent part of the house to my corporation as an office space(i.e. in a second Suite), I can claim the rent as a business expense. I actually do go to work in the company office, but my company allows me to work from home. I can tell my manager that I'll work from home >50% of time, so the home office will be the primary office. As a result, I shift the salary expense to rent expense so I pay myself a smaller salary and I will be in a lower tax bracket.

My questions are:
1. Is there anything illegal in what I'm doing?

2. Is there a legal difference if I rent the house to people or a corporation(as a second suite)? Is there a difference in the type of mortgage I can apply for?

3. Do I still qualify for the Principal Residence Income Tax Exemption?
http://www.cra-arc.gc.ca/E/pub/tp/it120r6/it120r6-e.pdf
I checked the legal definition of Principal Residence. From what I understand, It's only no longer a Principal Residence if you move out for an extended period of time. The house will still be listed as my principal residence and I will be in fact living there.

4. Most importantly, would I be able to claim the rental income(from the Corporation and other tenants) as a tax deduction against the mortgage interest?

[Bick Financial Toronto]

I have some question related to the Smith Maneuver

I am not sure what your questions have to do with the Smith Manoeuvre.

[poop_on_you]

I am not sure what your questions have to do with the Smith Manoeuvre.

I guess it's about general tax deduction on rental income, not Smith Maneuver(i.e. converting mortgage loan to investment loan).

As I understand, this is the tax deduction from the Smith Maneuver (Line 221):
http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/ncm-tx/rtrn/cmpltng/ddctns/lns206-236/221/menu-eng.html

Most interest you pay on money you borrow for investment purposes, but generally only as long as you use it to try to earn investment income, including interest and dividends. However, if the only earnings your investment can produce are capital gains, you cannot claim the interest you paid. For details, contact us.



I was just wondering if the rental income from a second suite of principal residence qualifies as investment income.

[Bick Financial Toronto]

I was just wondering if the rental income from a second suite of principal residence qualifies as investment income.

I would definitely contact a qualified accountant with your questions. Pay for his time and have some reliable answers.

[poop_on_you]

http://www.secondsuites.info/pros%20and%20cons%20of%20a%20second%20suite.htm

Under the Income Tax Act, you must declare all the rent you collect as income. But you can write off both the direct and indirect expenses of operating a second suite.

Direct expenses, which relate directly to the rental unit, are 100 per cent deductible. These include interest on the line of credit ($450), interest on the last month's rent ($42) and incremental property tax ($187).

Indirect expenses, which are shared with the whole house, are partially deductible. You can write off the 30 per cent portion that applies to the rental unit, including mortgage interest ($3,600), maintenance and repairs ($750), heat ($600), hydro ($600), water ($180), insurance ($150) and property tax ($1,050).


I don't know how reliable this is, but it seems that the portion of the rental income as a percentage of the rental unit can be deducted.

So theoretically, if I rent 80% of the house to my business, I should be able to deduct 80% of the mortgage interest, right?

[poop_on_you]

I would definitely contact a qualified accountant with your questions. Pay for his time and have some reliable answers.

Yes I will definitely do that, I was just wondering if anyone here had similar experiences. I know all my coworkers deduct EVERYTHING. I try to do everything as legally as I can.

[Bick Financial Toronto]

Yes I will definitely do that, I was just wondering if anyone here had similar experiences. I know all my coworkers deduct EVERYTHING. I try to do everything as legally as I can.

Deducting EVERYTHING is one thing. Being able to defend those deductions in case of a CRA audit is a very different story. However, often the CRA does not go after the small fries with their audit because the potential "pay off" is just not worth it for them. Maybe that's why your friends have not been caught yet. But if you are incorporated and your taxable corporate income is under $500,000, then there are all kinds of opportunities there for you to minimize and defer income tax. Your accountant and financial planner can help you with that: the accountant to minimize your taxes on the annually earned income and the financial planner to minimize and defer the income tax liability on your accumulated liquid assets.